(week 5) Articles of Association

By: Miss Amalina

• Under the Companies Act 1965,
every company was required to have
a memorandum and articles of
association.
• The memorandum and articles of
association are now collectively
known as the constitution, and it is
expressly stated in s31 and 38 CA
2016 that only a company limited by
guarantee shall have a constitution;
other types of company may or may
not have a constitution. It is optional
for them.
• If a company has no constitution, the
company, each director and each
member of the company shall have
the rights, powers, duties and
obligations as set out in the Act.
• ‘If the company has a constitution, the company, each director and each member of the company
shall also have the rights, powers, duties and obligations as set out in the Act, except to the extent
that such rights, powers, duties and obligations are permitted to be modified in accordance with this
Act, and are so modified by the constitution of the company’ (s31(2) CA 2016).
• In other words, the rights, powers, duties and obligations of the company, director and member are
prescribed by the CA 2016 unless modified by the company’s constitution.
• The company’s constitution can modify any of those rights, powers, duties and obligations only if
the Act permits it.
• For companies which were registered prior to the coming into operation of the CA 2016, s619(3)
provides that the memorandum and articles of association of a company existing before the
operation of the Act shall have effect as if made or adopted under the Act unless otherwise resolved
by the company. Thus, a company’s existing memorandum and articles shall form the company’s
constitution until the company alters it by passing a special resolution.
What is an article of association in
company law?

Articles of association (AoA) The document lays out how

is a form of document that
specifies the regulations for
a company's operations and
defines the company's
purpose.
tasks are to be accomplished
within the organization,
including the process for
appointing directors and the
handling of financial records.
The essential information in the Memorandum of Association is as follow:

i. The name of the company (private company’s name must end with the words “Sendirian Berhad” and
public company’s name must end with “Berhad”);
ii. The location of the registered office of the company
iii. Object clauses – The nature of business [intended to be carried out] of the company;
iv. The liability of the members is limited
v. The nominal amount of the authorized share capital with SSM.

The articles of association of a company, often simply called the articles, constitute the constitution of a
company. Simply put, the Articles detailing the rules and regulations governing the internal management of
the affairs of a company and the conduct of its business.
Company’s Object
• Section 21 CA 2016 provides that a company shall have
the capacity to carry on or undertake any business or
activity.
• Nonetheless, if the company has a constitution which
states the company’s objects, s35(1) provides that the
company shall be restricted from carrying on any
business or activity that is not within those objects.
• The CA 2016 does not prescribe the consequences of a
transaction outside the company’s objects clause. Thus,
the consequences of an ultra vires transaction are
uncertain.
 Alteration of the Memorandum of Association
• The memorandum of association is not a rigid constitution of the company; it is
subject to amendment whenever the need arises.
• The amendment of a provision of the memorandum of a company may be amended by
way of altering and deleting.
• The company proposing to alter the memorandum may pass a special resolution to the
effect. The alteration may only take effect on the issue of a certificate by the Registrar.
• The alteration of the object and capital clause is subject to confirmation by the court if
there is an objection. When application for the cancellation of an alteration is made,
the court may take into consideration certain factors before making an order
confirming the alteration. The court has a wide discretionary power to cancel or
confirm the alteration.
• Should there be no objection than the amendment would be enforced.
 Alteration of the Share Capital Clause
• Alteration of share capital if authorised by the article of association
could be attained by an ordinary or special resolution as provided by
article of association and section 62 of the Companies Act.
 Alteration of Object Clause
• A company might change or include additional businesses it intends to venture into. Section
28(10) of the Companies Act states that alteration of the object clause require a special resolution
by a three forth (3/4) or 75 per cent majority through a general meeting.
• Amendment to the object clause could be made to the memorandum as provided by section 21(1)
of the Companies Act. A memorandum could be amended according to section 28(1) of the
Companies Act, by a special resolution with 21-day notice to members and debenture holders.
• The amendment is only effective upon the lodgement of a special resolution with the Registrar of
Companies based on section 28(1) of the Companies Act not later than 14 days after the expiry of
21 days from the date of the resolutions passed.
 Questions

What would be
Is there any party considered by the
that may object to court for
the alteration? objection to the
alteration?
Answer 1:
According to section 28 of the Companies Act, after passing a special resolution, there
would be a grace period of 21 days. The rationale of the grace period is for any person
who wishes to object to the alteration of the object clause of the memorandum.

The parties that may object to the alteration are as follows:

I. Any member who holds at least 10 per cent of the company issued share capital;
II. At least 10 per cent of the company members, if the company is not limited by
shares; and
III. A debenture holder that holds 10 per cent of the company’s debentures.
Answer 2:
The parties which object to the alteration may bring the matter to the Malaysian court
of justice, which in this juncture, will decide based on the circumstances of the case
and consider the rights and interests of members and creditors involved based on
section 28(7)(a) of the Companies Act. The court is vested with the power as to
whether to confirm or cancel the alteration by virtue of section 28(7) (d) Companies
Act.
https://www.ssm.com.my/Pages/Legal_Framework/FAQS-ON-COMPANIES-ACT-2016-AND-TRANSITIONAL-ISSUES
/part_b.pdf

https://www.youtube.com/watch?v=giWBJFxX6Qc
• Drawing from the provisions in the Act, specifically s21 and 39, it is submitted that a
third party dealing with a company can assume that the company has full capacity to
carry on or undertake any business or activity.
• Section 39 provides that the doctrine of constructive notice applies only to documents
relating to instrument of charges. No person shall be deemed to have notice or
knowledge of the contents of the constitution, or any document (other than charges)
related to the company which has been registered by the ROC or which is available for
inspection at the company’s registered office.
• Thus, a third party dealing with a company can rely on s21 and 39 and assume that the
transaction in question is within the capacity of the company, for the company has full
capacity to carry on or undertake any business or activity
 Share Capital
Introduction
• Companies require financial resources or
capital to establish and run their business
activities, for example, to purchase raw
material, hire staff, acquire premises or
equipment and so on.
• Capital refers to the money required or can
be acquired by a company to start, run or
expand its business. Examples of principal
sources of capital include share capital, debt
finance, trade finance and retained
earnings, especially in the case of company
limited by shares.
Share Capital
• A company's capital adds up to all of the cash or the value of assets
received by a company from investors in return for the company's
shares
• Section 74 CA 2016, ‘All shares issued before or upon the
commencement of this Act shall have no par or nominal value.’.
• Nevertheless, a member who did not fully pay up on their shares
before 31 January 2017 would still be liable to the company for the
unpaid amount.
• Section 618(1)(b) still recognises the amount unpaid on shares as
the difference between the issue price of the share (excluding
premium) and the amount paid.
• With regards to the credit balance standing in the share premium
account as at 31 January 2017, s618(2) provides that the moneys
will become part of the company’s share capital unless the company
uses the moneys according to subsections (3) and (5).
 Authority to issue shares
- The general power to allot shares, grant rights to subscribe in the
shares, convert any security into shares and allot shares under an
agreement or option or offer is vested in the members by passing a
resolution (s75 of the CA 2016).
- However, there are exceptions to this general rule:
a) First, the directors may allot shares or grant rights under an offer to
existing members in proportion to the members’ shareholding.
b) Second, the directors may allot shares or grant rights on a bonus
issue of shares to existing members in proportion to the members’
shareholding.
c) Third, the allotment of shares to the company’s promoter that the
promoter has agreed to take.
d) Fourth, the shares are issued as consideration or part consideration
for the acquisition of shares or assets by the company.
• The CA 2016 has also included a provision in section 85 to safeguard
existing shareholders.
• It provides that where a company issues new shares which rank
equally to existing shares as to the voting or distribution rights, the
company must first offer the new shares to the holders of existing
shares on a prorated basis unless the company’s constitution provides
otherwise.
• This means all issues of shares shall be right issues unless otherwise
prescribed in the company’s constitution
 Classes of Shares

Preference Shares
Ordinary Shares
Ordinary Share
- Shares other than preferred shares and generally do not have special rights or
restrictions on the rights of shareholders.
- Shareholders of ordinary shares have the right to attend, participate in and
speak at a general meeting of shareholders, the right to vote on a show of
hands on any resolution of the company, the right to vote on a poll on any
resolution of the company, the right to an equal share in the distribution of the
surplus assets of the company, and the right to an equal share in dividends
(Article 71 (1)).
Preference Share
- Section 2(1) to mean a share by whatever name called, which does not entitle the holder to the
right to vote on a resolution or to any right to participate beyond a specified amount in any
distribution whether by way of dividend, or on redemption, in a winding up, or otherwise.
- A company cannot allot any preference shares or convert any issued shares into preference
shares unless provided by the constitution (Article 72 (1), Article 90 (4)).
- The companies Act sets out, as the rights of preferred shares, capital repayment, participation
in surplus assets and profits, dividends (cumulative or non-cumulative), voting right, priority
of payment of capital and dividend (Article 90 (4)).
- In other words, it is possible to issue shares with or without granting various rights (e.g.,
shares with priority of payment of dividends and shares without voting rights) (Article 90(2)
(a)).
Examples of preference shares include shares with priority of payment of dividends and
surplus assets and shares that are redeemable and have no voting rights (Article 72 (2))
• The CA 1965 did not permit the class rights to be varied if the rights were
incorporated in the company’s memorandum of association. However, the
class rights could be varied if they were found in the company’s articles and its
memorandum or articles allowed it.
• As a company’s memorandum and articles are now combined to form its
constitution, the CA 2016 allows the rights attached to the preference shares to
be modified or varied.
• If the company’s constitution has provided the procedure for the variation of
class rights, then the procedure is to be followed (section 91(1)(a)).
• If the constitution does not prescribe the procedure, then the company may do
so with the consent of the holders of the shares in that class (section 91(1)(b)).
The consent of the holders may be obtained as follows:
a) First the approval may be by way of written consent representing not
less than 75% of the total voting rights of the holders of shares of that
class.
b) Second, the approval may be given by passing a special resolution of the
holders of shares of that class.
Maintenance of Capital
• Generally, a limited company shall not return its
capital to its members. However, the CA 2016 has
prescribed some exceptions to this general
principle:
1. Reduction of Capital
2. Share Buyback
3. Financial Assistance
4. Dividend
Reduction of Capital
- Section 115 provides that a company may reduce its share capital following the procedures prescribed in the
section unless its constitution provides otherwise.
- According to s115, a company may reduce its capital by either (1) a special resolution supported by a
solvency statement from all directors; or (2) a special resolution confirmed by the court.

Share buyback
- Generally, a company is not permitted to purchase its own shares or that of its holding company (s123 and 22)
unless:
(1) a redemption of preference shares (s72);
(2) a cancellation of shares (s. 116 and 177);
(3) a share buyback by public listed companies (s127); or
(4) a remedy awarded by the court in a case of oppression (s346).
Financial assistance
- Section 123 CA 2016 also does not permit a company to give any financial assistance for
the purchase of its own shares or that of its holding company.
- There are exceptions prescribed in s125 and 126 namely
(1) where the lending of money is part of the company’s ordinary business;
(2) where it is for a trust scheme for employees;
(3) where the financial assistance is given to employees for their own benefit;
(4) where the company is regulated by written laws relating to a bank, insurance or
takaful or which are subject to the supervision of the Securities Commission; or
(5) where the company is not a public listed company, and it has complied with the
conditions listed in s126.
Dividend
- The dividend rule is found in s131. It has two principles:
(1) The dividend is to be paid out of the company’s profits; and
(2) The dividend should not be paid if the payment will cause the company to be insolvent. As the
directors are the ones who authorise the payment of dividends, they must be satisfied that the
company will be solvent after the distribution is made.
- Section 133(2) provides for the liability of the director and manager who wilfully paid or permitted to be
paid dividends out of what they knew to be not profit. They are liable to the company to the extent of the
amount exceeding the value of any distribution of dividends that could properly have been made.
- The CA 2016 also prescribes the new liability imposed on the member. Section 133(1) states that the
company may recover the amount of distribution received by a shareholder which exceeds the amount
which could properly have been made unless the shareholder
(1) has received the distribution in good faith; and
(2) has no knowledge that the company did not satisfy the solvency test
Share Certificate
• Section 97 CA 2016 provides that it is no longer
necessary for a company to issue a share certificate to a
shareholder unless the company’s constitution requires
it or the shareholder applies to the company for one to
be issued to them
 Transfer of shares

• Section 106(1) provides that the company shall register the transfer of shares within 30
days from the receipt of the instrument of transfer unless the following conditions are
fulfilled:
(1) The CA 2016 or the company’s constitution expressly permits the directors to
refuse or delay the registration for reasons stated; 
(2) The directors have passed a resolution to refuse or delay the registration of the
transfer within 30 days from the receipt of the instrument of transfer and the
resolution states the reasons for the rejection or delay, as the case may be;
(3) The notice of the resolution is sent to both transferor and transferee within seven
days of the resolution, and where the company is a public company, the notice of
the resolution must also include the reasons for rejection or delay of the transfer.
Questions

1. What is share capital in a

Company Law?
2. What are classes of shares in a
Company law? Explain.